1986 (10) TMI 92 - AT - Income Tax

Issues Involved:
1. Assessability of security forfeited by the assessee company
2. Allowability of weighted deduction under Section 35B
3. Weighted deduction on commission paid to Indian agents on exports
4. Allowability of entertainment expenditure (only for assessment years 1978-79 to 1980-81)

Issue-wise Detailed Analysis:

1. Assessability of Security Forfeited by the Assessee Company:

The assessee-Corporation forfeited various amounts as earnest money deposits from purchasers of nylon yarn, vanaspati, and foreign cars. The IAC (Assessment) treated these forfeited amounts as revenue receipts and thus assessable as income. The CIT(A) upheld this view, referencing amendments to Section 28(iv) and Section 2(24) of the Income Tax Act, which included benefits arising from business activities as taxable income.

However, the Tribunal noted the need to examine the agreements between the assessee-Corporation and its customers to determine whether the forfeited amounts were part of the trading receipts or merely security deposits. The Tribunal referenced Supreme Court rulings in K.M.S. Lakshmanier and Sons vs. CEPT and Punjab Distilling Industries Ltd. vs. CIT, which distinguished between advance payments and security deposits. The Tribunal restored the matter to the ITO to scrutinize the agreements and determine the nature of the forfeited amounts for the relevant assessment years.

2. Allowability of Weighted Deduction Under Section 35B:

For the assessment year 1977-78, the assessee claimed weighted deduction under Section 35B on expenditures, including foreign office expenses and administrative expenses. The IAC allowed partial deductions but disallowed the claim on administrative expenses. The CIT(A) estimated that only 10% of the administrative expenses related to exports and allowed a 75% deduction on this estimated amount.

The Tribunal noted that a detailed examination of each expenditure item was necessary, referencing the Tribunal Special Bench decision in the case of M/s J. Hemchand & Co., Bombay. The Tribunal restored the matter to the IAC (Asst.) for fresh examination for the assessment years 1977-78, 1978-79, and 1980-81.

3. Weighted Deduction on Commission Paid to Indian Agents on Exports:

The IAC (Asst.) had disallowed the assessee's claim for weighted deduction on commission paid to Indian agents, a decision upheld by the CIT(A) based on CIT vs. Southern Sea Foods (Pvt.) Ltd., which held that procuring orders did not qualify for deductions under Section 35B(1)(b).

The Tribunal referenced the Tribunal Special Bench decision in ITO vs. Bharath Skin Corporation, which allowed deductions for services rendered by STC, including market information and buyer identification. The Tribunal restored the matter to the IAC (Asst.) to examine the services rendered by Indian agents and determine the eligibility for weighted deductions for the relevant assessment years, excluding 1979-80.

4. Allowability of Entertainment Expenditure (Assessment Years 1978-79 to 1980-81):

The assessee incurred entertainment expenses for foreign customers, which were disallowed by the IAC (Asst.) and the CIT(A) based on Explanation 2 to Section 37(2A) introduced by the Finance Act, 1983.

The Tribunal considered the assessee's argument that part of the expenditure was for staff involved in inter-departmental meetings and business conferences. The Tribunal directed that 10% of the entertainment expenditure be considered as relating to employees and thus allowable outside the ambit of Explanation 2 to Section 37(2A) for the assessment years 1978-79 to 1980-81.

Conclusion:

The appeals were partly allowed for statistical purposes, with specific issues remanded to the ITO and IAC (Asst.) for further examination and determination based on detailed scrutiny of relevant agreements and expenditure items.

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